HMRC Sending Tax Nudge Letters To Crypto Investors
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In this blog we will look at the recent case of HMRC sending tax nudge letters to crypto investors – asking what nudge letters are, and why crypto investors are in the spotlight.
The numbers are significant. At the last count, more than 3.3 million UK citizens held some form of cryptocurrency.
What makes this most striking is that in our September blog which explained what cryptocurrency is, we cited figures of 2.3 million. That’s some jump in under a year.
Given the significant crypto holdings among the UK population, it is unsurprising HMRC are alert to the potential economic and tax implications.
Earlier this year, HMRC updated its Cryptoassets Manual, recognising the speed at which this space is developing.
Read on for our take on HMRC sending tax nudge letters to crypto investors.
What is a tax nudge letter campaign?
Beginning in November last year, HMRC’s crypto tax nudge letter campaign is nothing new.
Such campaigns are used to remind taxpayers to check their tax affairs and ensure their payments are up-to-date and accurate.
Rather than specifically targeting individuals suspected of submitting incorrect tax returns, the purpose of a nudge letter campaign is primarily for information gathering.
That said, receiving a letter won’t be by chance.
HMRC have been collecting crypto data for several years now.
As well as international treaties enforcing the share of information, HMRC have contact with crypto exchanges such as Coinbase, who contacted users earlier this year to inform them that additional Government-required information would be required.
Many users of “decentralised finance”, such as cryptocurrencies, are averse to Government intervention – but we predict HMRC’s involvement in this emergent financial world only to increase over time.
However, the crypto tax nudge letter campaign isn’t simply about boosting short-term tax revenues for HMRC.
The letters also serve an educational purpose. Still in relative infancy, crypto tax regulations aren’t widely known, and the accessibility of the space has encouraged numerous new investors – who may likely have not managed similar tax processes before.
Why is HMRC looking at crypto investors?
The answer won’t shock you: significant amounts of potential tax income.
Cryptocurrencies present a possible source of hidden wealth, and the figures stated in our introduction provide some hint as to just how much value might be tied up in digital money.
In a similar manner to the ICAEW (Institute of Chartered Accountants in England and Wales), HMRC view cryptocurrencies as a chargeable asset rather than cash.
Therefore, as investors, crypto traders are liable to Capital Gains Tax (CGT). CGT is a tax on the profit made on an investment – and given the sharp increases in value of numerous cryptocurrencies in the past few years, some coin holders may be facing a serious tax bill.
It’s worth flagging that it isn’t just cryptocurrency traders who may face a CGT bill. Buying and selling non-fungible tokens (NFTs) is also considered investing and has tax implications. Read our blog for more information about NFTs and taxes.
Do I need to pay tax on my crypto investments?
Whether you are liable to pay tax on your crypto investments will depend on whether you are simply “hodling” (a crypto term for those who invest in a currency and do not resell) or if you are actively trading and “disposing” of your assets.
If you’re making a profit on your trades, there may be a tax liability in the form of CGT.
We could write an entire blog on the potential tax implications of crypto investments – in fact, we have. Read our guide to cryptocurrency and UK tax.
However, it is a fast-moving space, and not everyone will be aware of whether they are liable or not.
What’s more, there can be significant repercussions if HMRC discover a liability which isn’t voluntarily disclosed.
To avoid such a situation, we strongly advise assessing your crypto tax affairs with a Chartered Accountant.
Conclusion: HMRC sending tax nudge letters to crypto investors
If you own cryptocurrency, you shouldn’t be unduly concerned by HMRC sending tax nudge letters to crypto investors.
It is simply “a sign of the times” – HMRC’s involvement in the crypto space is just beginning and is here to stay.
It should also serve as a prompt to take account of your tax affairs to ensure you don’t end up stung by any kind of HMRC penalty.